In spite of the bitter cold temperatures across major portions of the high demand US east coast the Nat Gas futures market is struggling to stay in positive territory. It is obvious from the way the market has been trading that the forecasts are taking on more importance insofar as price direction than the actual current weather. With less than half of the winter heating left to go the market is very uncomfortable with the projections to warmer than normal temperatures returning before the end of January. In addition the 90 day forecast is projecting winter like weather only during the month of February with an early spring arrival.
No matter how one slices and dices the weather the Nat Gas market is going to need a sustained cold spell for inventories to get down to near normal levels by the end of the heating season. As it stands at the moment it does not look like that will be the likely scenario. As I have been discussing there is no reason to believe that the futures price of Nat Gas is going to collapse between now and well into February. However, there is no reason to expect that prices will surge significantly higher over that same time frame.
If the longer term forecasts turn out to be mostly accurate the price of Nat Gas futures will come under some pressure as we enter into the March timeframe. However, it is time to keep in mind that the major recovery in prices in 2012 was due to a combination of hotter than normal temperatures and an early start to the cooling season along with coal to Gas switching. With the longer term forecasts currently calling for above normal temperatures much earlier than normal we could be setting up for an early cooling season as we had last year. If so the downside in prices as we get to April could be limited. Something to keep on the radar as this winter does not look like it is going to be the answer that the bulls were expecting.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 24th at 10:30 AM. This week I am projecting an average withdrawal of 170 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 162 BCF and the normal five year net withdrawal for the same week of 176 BCF. Bottom line the inventory surplus will narrow marginally this week versus last year and hold steady compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year but below the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 155 BCF. The surplus versus the five year average for the same week will come in around 321 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 120 BCF to about a 180 BCF net withdrawal with the consensus still forming.
Oil prices continue to slowly inch higher as the market sentiment seems to be moving more and more toward a bullish bias. The spot Nymex WTI futures contract has been hugging the upper end of the upward trending trading channel since the middle of January. Although the nearby fundamentals are still biased to the bearish side there have been a plethora of items that have helped to keep the markets focus more on the forward fundamentals which at the moment look more constructive than the nearby supply & demand balances.
From a technical perspective the spot WTI contract has now cleared its last resistance hurdle of $95/bbl and moved into a new... higher trading range of $95/bbl to $100/bbl. On a longer term view the spot WTI contract has been in an uptrend since bottoming out at around $85/bbl back in the first half of December of 2012. The spot Brent contract has not moved to the upside with the same conviction as the WTI contract as more market participants shed some of their long Brent/WTI spreads. Since mid-December the Spot WTI contract has increased by almost $12/bbl while the spot Brent contract has gained about $5/bbl. That is a significant adjustment in the spot Brent/WTI spread.
The March Brent/WTI spread is now trading around the $15.70/bbl level or the lowest level since the second half of September. Although the crude oil inventory situation in both Cushing, Ok and PADD2 are still sitting at all time highs the changing logistics has the market convinced that the draining of this region of the US of its surplus crude oil will begin with earnest over the next month or so. The expanded Seaway pipeline is already pumping near its new maximum capacity of about 400,000 bpd and along with rail and barge movements we should begin to see an impact at least by the second quarter at the latest. With more and more oil from the prolific Bakken field moving all the way to the east coast of the US east Canadian crude oil has now actually moved to north West Europe recently.
Eastern Canadian crude almost always goes to the US north east refineries. In a rare situation the arb window to move about 2 million barrels of East Canadian crude oil to north west Europe opened. It is too early to say that this arb movement will now be a sustained changed in the logistics but it certainly is worthy of putting on the radar as something that could have an impact on the Brent/WTI spread if it continues.
If the movement becomes more regular it serves to move more crude out of the surplus Midwest US to the east coast to displace east Canadian crude. That is bullish for the WTI side of the equation while the movement of east Canadian to north west Europe is bearish for the Brent side of the spread. In essence it is like virtually exporting US crude oil (which is not permitted). So yes something to watch on the changing physical relationships of an international crude oil market that has been dynamically changing for the last few years. Barring a major geopolitical event impacting the flow of oil to Europe I would say that the Brent/WTI spread has likely peaked for the year and will continue in a slowly evolving downtrend throughout the year. I am expecting the spread to be trading in single digits by the third quarter of this year.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather forecasts. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish at the moment.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.
Markets are mostly lower as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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